Following Thursday’s disappointing news out of the European Central Bank (ECB), oil futures and the United States Oil Fund (NYSEArca: USO), which tracks West Texas Intermediate crude oil futures, soared, perhaps positioning the commodity for a volatile day on Friday.
Today is the day of the meeting of the Organization of Petroleum Exporting Countries (OPEC) and USO comes into the day with a one-month loss of more than 16%. OPEC has kept up production to pressure high-cost rivals, such as the developing U.S. shale oil producers. The International Energy Agency expects it will take several years before OPEC can effectively price out high-cost producers. [Oil ETFs Face World-Record Supply Glut]
“OPEC is widely expected to stick to its policies – enforced by Saudi Arabia’s oil minister Ali al-Naimi a year ago – of defending market share by pumping record volumes to drive rival, higher-cost producers out of the market,” reports Reuters. “While the Saudis can claim a partial victory over the U.S. shale oil boom, production from top non-OPEC rival Russia continues to surprise on the upside and OPEC members Iraq and Iran are set to add new barrels. World oil stockpiles are at a record, according to the International Energy Agency.”
“I think there are some potential trades that could come out of the ECB moves. It’s tough to buy the euro when it’s up nearly 3 percent on the day. Crude, however, remains on its lows despite its high historical correlation to the euro. I am considering a long position in crude at current levels and then increasing that position if the January contract can settle above $44 a barrel. I realize that the $44 level seems far off but not when you consider that crude has lost around 70 bucks in a little over a year,” writes Jim Iuorio for CNBC.
In the face of the rising global supply glut, investors can utilize a number of inverse or bearish ETF options to hedge against further declining energy prices. For instance, the United States Short Oil (NYSEArca: DNO) tracks the opposite moves of the West Texas Intermediate crude oil futures, and the DB Crude Oil Short ETN (NYSEArca: SZO) also tracks the simple inverse of oil. [Leveraged ETFs Are Popular Plays Among Swing Traders]
Crude oil-related exchange traded funds are continuing their downward spiral as the global supply glut distends on increased production out of the Organization of Petroleum Exporting Countries. There are reasons for investors to be cautious with volatile energy ETFs. Moreover, if oil prices falls to new lows and the shale industry is unable to turn a profit, the highly leveraged industry may find it harder to repay debt obligations.
United States Oil Fund
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.